Use of credit cards has become very prominent nowadays. Most of the holders would opt as much as possible to charge every expense they may incur to the credit card account. This is mainly because the credit cards they hold serve them numerous benefits – convenience in queueing, credit charging of expenses, holders are prioritized in notifications for some deals and sale promotions, are among them. Due to these advantages the credit cards provide to holders, some even take more than one credit card. However, some tend to misuse and abuse the use of credit card which sometimes leads to piled up and accumulated credit card debts. Here is where consolidation comes in.
One of the most common consolidating alternatives for credit cards is the balance transfer. A balance transfer is a process of transferring high-interest debts from one or more credit cards to another card with a lower interest rate. This tactic will help you divert your payments to the principal balance each month rather than to interest charges which can help you pay off your credit card debts.
If you happen to be a credit card holder and is currently under financial distress, here are the basic things you have to know about balance transfers. You may consider these things before deciding to consolidate your credit card debts by answering the following questions:
- How does balance transfer work?
- How can consolidation benefit you and your credit?
- Does debt consolidation ruin your credit?
1. Transferring versus repaying
As the name suggests, the debt is only transferred to a debt instrument with more favorable credit terms. The only definite benefit in consolidating your credit card debts through balance transfer is the cost you may save from the interests and other costs you incur for the multiple high-interest debts.
2. Consolidating can simplify multiple payments
Another important benefit the balance transfers provide is the simplified and unified payment of debt since the multiple credit card debts will be transferred into a singular loan.
3. Not just credit card debts…
A balance transfer is not solely for consolidation of credit card debts but also for other debts such as car loans and other costly loans.
4. Fees are inevitable
Your benefits will not come in free terms. You will be then required to pay a balance transfer fee which is a percentage of the total amount you are transferring.
5. Promotional APR rates expire
One wooing strategy of credit card provider for the debtors to decide to consolidate thru balance transfer is the “teaser rate” where the consolidation will be offered at an extra-low annual percentage rate (APR), sometimes as low as 0%. But this promotional strategy won’t stay long. After a given period, usually ranging from 6 months to 1 year, the interest rate will increase drastically to the regular consolidating rate. Worst case is that the costs from this new rate may be worse than the costs from the interest of loans you are trying to get away from.
Resolving and deciding on whether or not you will consolidate should be thoroughly thought through but should not take that much time that you to miss the maximum potential advantage you can possibly get. You should maximize every step of the consolidation process.
6. New debt. New Purchases
If in case you grabbed the opportunity on teaser rates, be mindful that the rate would not apply to your new and additional purchases which you may opt to charge to the new credit line. The 0% teaser rate is a consolidating rate and is therefore and should only be applicable to that purpose.
In addition, just because you have cleared the debt of one of your credit cards (since the debt will only be transferred and the account and the credit line remains), be watchful of the temptation of using the credit card again for new credit card expenses. This will only pile up to your new loan from a balance transfer. With this, you are defeating the purpose of your consolidation and the maximum benefit won’t be achieved.
7. Learn the basics
As a consolidator, you should be well aware of the what’s and how’s of the consolidation technique/s you implore. The allocation of the payments should be decided by the consolidator and not by the credit institution. Based on the applicable laws, if there is no stipulation, the excess payments to the minimum required payments should be applied to credits with the highest-interest rate first. Most credit card provider will apply this to the lowest interest first as it is more beneficial to them.
8. Don’t repeat.
If you happen to miss the teaser rate, you might be thinking “the best is yet to come”. You might think of applying for another balance transfer card. While it is sometimes true to some, this may have an adverse effect on your credit score. You should be mindful that you are applying for new credit and your lenders may initiate a hard pull on your credit file, and for every lender, you will apply debt consolidation is a few points deduction from your credit score.
9. Good score qualifies.
Again, this is new technology and that would entail review and visit of your credit file and history. As much as the credit card institution would want a settlement of your credit card debts, application for balance transfer will pitch their interest on your credit history, not to mention a hard inquiry is a basic requirement for the application assessment and a deciding factor whether or not they will loan to you.
In case your score does not qualify for a balance transfer, focus on paying off and reducing the outstanding balances of your credit cards. After which, an improved mark may be recorded in your credit file and history. By then, you may decide to apply for credit rebuilding line of credit; your application may have a greater chance of approval due to the positive marks from your settlements.
Takeaway
Owing is easy. Repaying is hard. Careful attention should be maintained otherwise you will find yourself sinking to an overwhelming sea of debts. Develop a repayment plan and stick to it. If you can’t make payments, ask for help. You won’t go to jail for nonpayment of your debts but there are other legal repercussions for the unpaid debts. Debt consolidation is developed for this and financial institutions and credit unions are very much able to help. Settle cautiously and do not just dive through in a not well-thought consolidation technique just because you are very eager to clear that debt off. You can’t be in debt forever. The key is to always be cautious and mindful of your spending patterns and address credit problems immediately.
